TORONTO—Toronto and Vancouver lead the way as destinations for commercial real estate investments within Canada, with prices spiking in both cities, encouraged by sales of high-priced “trophy” assets, says a new report.
Avison Young's Fall 2016 North America, U.K. and Germany Commercial Real Estate Investment Review was released Oct. 12 with reports on 51 markets in four countries — the United States, Canada, Germany and the U.K.
The Avison Young report indicated that overall in the four nations, investor appetite for commercial real estate assets remains relatively healthy despite ongoing geopolitical influences, which lend some uncertainty to the marketplace.
Canada's commercial real estate investment market remains stable, despite regional pressures affecting fundamentals, the report stated.
The abundance of capital in the marketplace continues — the result of low-cost borrowing, a favourable exchange rate, and demand from both domestic and foreign investors — but activity is restrained by the limited supply of product.
"Foreign investors continue to see Canada as a safe place for their money, particularly in gateway markets such as Vancouver and Toronto — often resulting in elevated pricing," said Bill Argeropoulos, a Canadian analyst for Avison Young.
The report said some headline deals from the first half of the year, such as Scotia Plaza in Toronto and Bentall Centre and Royal Centre in Vancouver, caused a repricing of trophy assets in these key markets, which has carried over into the second half of 2016. As a result, further noteworthy transactions are expected before year-end 2016 or in early 2017 as institutional players contemplate bringing properties to market to take advantage of high pricing.
In Alberta, investment volumes were only slightly muted despite challenged leasing fundamentals as pension-fund-backed property owners in Calgary and Edmonton experienced less pressure to liquidate assets at a discount than did REITs.
Demand for commercial real estate assets in Canada's six major markets — Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver — surged 34 per cent compared with the first half of 2015 with first-half 2016 proceeds of $14.4 billion, on pace to exceed the record $28 billion sold in all of 2012.
Toronto remained the top investment market ($5.9 billion/41 per cent share) in the first half 2016 — up 26 per cent year-over-year. Vancouver kept pace ($4.4 billion), recording the greatest annual sales increase (118 per cent), driven largely by foreign investors' appetite for trophy office product.
Office building sales ($4.2 billion) led all asset categories, posting the greatest annual increase, Avison Young reported.
Top-ranked Vancouver and second-place Toronto combined for almost 90 per cent of the total office tally.
However, investment was skewed by large single-asset and portfolio sales.
Typically low vacancy rates and stable returns helped multi-residential investment increase 15 per cent to $2.8 billion.
Sales fell in Calgary and Edmonton due to economic uncertainty and Toronto, due to supply constraints, while surging in Ottawa.
Retail advanced 22 per cent to $2.5 billion as investors coveted a broad spectrum of urban and suburban assets, said the report.
While Toronto was the only market to exceed $1 billion in sales, Vancouver posted the greatest year-over-year growth as retail trades more than doubled.
ICI land and industrial each had $2.4 billion in sales with land investment growing 14 per cent, while industrial trades slipped five per cent from a standout result one year earlier.
"Given the first-half performance and deals currently in the pipeline, 2016 has the potential to be a banner year — with as much as $29 billion in transactions, a figure not seen since 2012 — or at least give a strong head start to 2017," concluded Argeropoulos.